Rudi’s View: Analysts Versus Pessimists, The Battle Royale Of 2021?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 29 2021

In this week's Weekly Insights:

-Analysts Versus Pessimists: The Battle Royale Of 2021?
-Icarus Explained: Charter Hall
-Conviction Calls
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

Analysts Versus Pessimists: The Battle Royale Of 2021?

Last week, I wrote about how 3/4 of ASX stocks covered by stockbrokers is still trading below analysts' price targets, at a time when many believe the share market is overvalued, see

This week I can follow up with the fact that a similar discrepancy can be observed through the Buy, Hold and Sell ratings issued by those analysts for ASX-listed stocks. FNArena monitors seven leading local stockbrokers daily. This allows us to collate data that are not available elsewhere.

One set of such data are the total in Buy, Hold and Sell recommendations as carried by those seven stockbrokers, covering in excess of 400 ASX-listed companies. Contrary to what some might believe or speculate, stockbrokers do not always carry mostly Buy ratings, and history shows very distinctive patterns that might provide investors with additional insights.

When lining up all the ratings today, the first observation to make is the total in Sell ratings is near an historical low of 6.3%. The long term average would be above 10% and the graphic below shows it can be as high as 20% which occurred in late 2013, but total percentages of Sell ratings were equally high in 2014, 2015 and in 2009.

As one would instinctively expect, there is a correlation between Sell and Buy ratings. As the graphic above shows, each peak in Sell ratings concides with a low in Buy ratings, and vice versa. Today, both Sell ratings (in grey) and Neutral/Hold recommendations (orange) are as low as FNArena has measured them, in terms of percentages of total ratings, since 2012.

Prior to 2012, we observe a similar pattern in 2010, and in 2008.

The key difference between the situation today and those three preceding periods is, of course, that today share market indices are near all-time record highs, and share prices have clocked up strong gains from last year's pandemic lows, while profit and dividend forecasts are rising and price-earnings ratios (PEs) are well above historical averages.

As such, there is an argument to be made 2021 has a lot more in common with 2006 and 2007, when global optimism was high leading into the GFC. But the general context for analysts recommendations was quite different at that time with Neutral/Hold ratings above 50% (as high as we ever measured them) and total Buy ratings at 33% as low as we've ever measured them, as a percentage of total ratings.

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